China’s Apparel Market, 2014 December 2014 Fung Business Intelligence Centre

1 Table of contents

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2 Executive summary

China’s apparel market remains Ladies’ wear is the major Outdoor apparel is one of the fastest growing contributor to total apparel sales. growing fast. Chinese markets in the world. The rise of Its growth rate is still ahead of the consumers’ growing interest in e-commerce and the rise in fast overall apparel sales growth. outdoor activities has fashion have fuelled the fast underpinned the strong growth growth of the market. of outdoor apparel.

Department stores and Chinese consumers are Fast fashion players have specialty stores remain the prudent when spending on continued their growth major distribution channels for luxury apparel. Meanwhile, momentum in China. Apart from apparel in China. Nevertheless, affordable luxury adopting aggressive expansion online retailing is the apparel at relatively cheaper strategy, they have pursued multi- fastest growing sales channel for prices are becoming popular. brand strategy to capture larger apparel in China. market share in China.

3 Market overview

4 Market overview China’s apparel market remains strong despite slower growth

 China’s apparel market remains one of the fastest growing markets in the world. According to Euromonitor, China is set to overtake the U.S. and become the world’s largest apparel market by 2017*.

 Retail sales value in 2013 showed slower growth against 2012 − According to the National Bureau of Statistics of China (NBS), the total retail sales of clothing, shoes, hats and textiles by enterprises above designated size** in 2013 rose nominally by 11.6% year-on-year (yoy), down from 18.0% yoy growth in 2012.

 Growth of unit price of clothing slowed − According to the NBS, the clothing price index has increased by 2.3% yoy in FY13, down from 3.1% yoy in FY12. − Facing the less favorable economic conditions and fierce competition, many apparel enterprises resorted to frequent promotions to attract consumers. Exhibit 1: Total retail sales of clothing, shoes, hats and textiles Exhibit 2: Monthly clothing price index, October 2013 – by enterprises above designated size, 2009 - 2013 October 2014

1,200 1,141.4 30% 24.8% 102.8 24.2% 977.8 1,000 25% 102.6

18.8% 795.5 102.4 800 18.0% 20% 102.2 587.4 600 15% 102.0 462.2 11.6% 101.8

Billion yuan Billion 400 10% yoy growth yoy (%) 101.6 200 5% 101.4

0 0% 2009 2010 2011 2012 2013 Source: NBS Source: NBS

* “China to overtake US as largest apparel market by 2017.” 26 April, 2014. Euromonitor International. **Enterprises above designated size refer to enterprises with annual sales of 5 million yuan or above and with an employment of or over 60. 5 Market overview Annual expenditure on clothing increases steadily

 Urban households − The annual per capita disposable income of urban households grew by 7% yoy to 26,955 yuan in real terms in 2013. − Urban households spent 1,902 yuan on clothing in 2013, accounting for 10.6% of the total annual expenditure.

 Rural households − The annual per capita net income of rural residents grew by 9.3% yoy to reached 8,896 yuan in 2013. − Rural households spent 438.3 yuan on clothing in 2013, accounting for 7.2% of the total annual expenditure.

Exhibit 3 : Per capita annual expenditure on clothing of urban and rural households, 2009- 2013

2,000 12.0 10.47 10.72 11.05 10.94 10.55 10.0 1,500

8.0 6.83 7.21 7.32 7.17

1,000 6.62 6.0 % Yuan 4.0 500 2.0 0 0.0 2009 2010 2011 2012 2013

Per capita urban annual expenditure on clothing Per capita rural annual expenditure on clothing Share of clothing in per capita urban annual expenditure Share of clothing in per capita rural annual expenditure

Source: NBS, CNCIC

6 Market overview Ladies’ wear is the largest sector

 Ladies’ wear is the major contributor to total apparel sales and total sales volume according to the China National Commercial Information Centre (CNCIC)*.

Exhibit 4: Retail sales volume of selected apparel categories in Exhibit 5: Retail sales of selected apparel categories in 100 100 major retailers in China, 2012 – 2013 major retailers in China, 2012 – 2013 2012 2013 2012 2013 Retail sales Retail sales Million pieces yoy % growth Million pieces yoy % growth yoy % growth yoy % growth (billion yuan) (billion yuan) Men’s suit 12.94 5.2 14.08 9.4 Overall 207.01 12.5 214.80 5.1 Men’s shirt 9.90 -1.7 8.78 -5.9 Menswear 40.97 12.4 42.06 0.5 T-shirts 13.23 0.7 11.28 -8.2 Ladies' wear 60.09 15.6 67.77 6.2 Ladies’ wear 141.71 4.1 142.31 7.3 Children's wear 5.54 14.8 6.31 12.7 Children’s wear 34.53 5.1 36.38 11.1 Source: CNCIC Denim wear 4.78 -7.9 4.10 -6.6 Jackets 7.44 -2.8 5.97 -2.9 Sportswear 25.38 4.6 28.58 5.4 Thermal clothing 9.51 -1.5 9.45 -6.9 Leather wear 1.16 11.9 1.09 1.1 Trousers 10.29 -2.9 9.49 -3.5 Knitted underwear 58.12 1.1 54.30 -2.9 Woolen wear 21.51 -6.7 19.37 -4.8

Source: CNCIC

* The China National Commercial Information Centre (CNCIC) monitors monthly sales of selected sectors in 100 major retailers. 7 Analysis of sub-sectors Ladies’ wear: Growth is decelerating but is still ahead of overall apparel market  Sales growth for ladies’ wear market has been slowing over recent years amid the sluggish economy; however, its growth rate is still ahead of the overall apparel sales growth, suggesting the relatively stable demand for women’s wear against other apparel sub-sectors*. Exhibit 6: Overall apparel and women's wear sales growth in major retailing enterprises, 2009-2013 30 25.6 27.6 25 23.3

% 20 21.2 21.6

15 15.6 15.6 10 12.5 6.0 5 5.2 0 2009 2010 2011 2012 2013

Overall apparel sales growth (%) Women's wear sales growth (%) Source: CNCIC

 Ladies’ wear market remains highly segmented – casual wear, fashion for young ladies, fashion for mature women, fast fashion, business casual and high-end fashion are some major sub-segments.

 Fast fashion market is growing fast. Consumers are becoming more familiar with international fast fashion brands which offer stylish clothing at affordable prices.

 Korean and Japanese fashions are increasingly popular among Chinese female shoppers as their designs are more appropriate for Chinese people given similar skin tone and stature**.

*”2013 Statistical Report on consumer goods.” 2013. The China National Commercial Information Centre. P.28. ** “Womenswear in China.” 28 May 2014. Euromonitor International.

8 Analysis of sub-sectors Menswear: Growth is slowing; designs are growingly fashionable

 In 2013, growth of menswear decelerated and the market share of Top 10 brands in the men’s suit and men’s shirt also shrank.

 Men’s suits saw the slowest growth in 2013 due in part to consumers’ prudent spending amid flagging economy as well as the government’s anti-corruption drive.

 The growing fashion trend for casual wear, especially among younger generations, has further undermined the sales of men’s suits.

 Fast fashion for men is gathering pace for its modern and fashionable design as well as competitive prices.

9 Analysis of sub-sectors Children’s wear: Growth is strong; consumers are brand-conscious

 Children’s wear registered dynamic growth of 12.7% yoy in 2013, with total sales reaching 6.31 billion yuan*.

 Population of children aged 0-14 years totaled 223.16 million in 2013, accounting for around 16.4% of the total population in China**. The Chinese leaders relaxed the national “one-child policy” in December 2013, allowing couples to have two children if one spouse is an only child. China is expected to add 1-2 million extra kids over the next few years. The increasing children population offers the children’s wear players a solid base for expansion.

 As income levels rise, Chinese parents are more willing to spend money to make their children look fashionable. Consumers are generally more brand-conscious and drifting towards fashion and lifestyle brands. Children’s wear made from soft and comfortable materials and casual children’s sportswear with cozy fabrics and loose-fitting designs have become the market trend.

 Although consumption needs have gradually switched from practical considerations to aesthetic and fashion considerations, the majority of parents in China still look for “value for money” products.

 Competition in the children’s wear sector is getting fierce. Many apparel brands have tried to ride the booming children’s wear market by extending their product lines. − Foreign examples: Baby Dior, D&G Baby, ARMANI Junior, Gucci, Adidas, Nike − Domestic examples: Xtep, Anta, 361 Degree, Li Ning, Stepwolves, Baoxiniao, JNBY, GXG

*China National Commercial Information Centre (CNCIC) **National Bureau of Statistics of China website - http://data.stats.gov.cn/search/keywordlist2

10 Analysis of sub-sectors Sportswear: Lower-tier cities are becoming the major battlefield

 Sportswear market in China is a relatively concentrated and mature sub-sector.

 Domestic sportswear brands are dominating the lower-tier cities while international brands are mainly concentrated in tier 1 and tier 2 cities. However, leading players such as Nike and Adidas are adjusting their market strategies and shifting their focus to lower-tier cities in search for further growth. − Nike has announced plans to enter smaller cities in China, targeting customers with a low-price strategy*. − Adidas has been aggressively adding new stores in tier 2 to tier 4 cities. By the end of 2013, the firm had 7,600 stores in China, covering around 1,000 cities, ahead of Li Ning (5,915 stores) and subsequently following Anta (7,760 stores)**.

 Overstocking remains a major concern for domestics leading sportswear players; an increasing number of international giants are planning to open discount stores to sell their huge stockpile. − Nike registered revenue decline of 5% in China in 2013**. The firm has announced plans to set up 40-50 factory outlets in China to sell product at a discount to clear its high inventory*. Exhibit 7: Domestic sportswear company inventory levels, 2006-2013

*” Foreign sportswear brands up the ante.” 15 March, 2013. China Daily. http://usa.chinadaily.com.cn/weekly/2013-03/15/content_16309896.htm ** “China consumer: From factory to franchise store.” 27 August 2014. Standard Chartered. Source: Standard Chartered https://research.standardchartered.com/configuration/ROW%20Documents/China_consumer __From_factory_to_franchise_store_27_08_14_08_50.pdf 11 Analysis of sub-sectors Outdoor: Both domestic and foreign players are expanding their market shares  Thanks to Chinese consumers’ growing interest in outdoor activities such as skiing, hiking and mountain climbing, outdoor apparel has continued to register strong growth in China, with total retail sales hitting 12.4 billion in 2013, up by 35% yoy*.

 Functional products with fashionable designs are the keys to win the market. Domestic outdoor player such as Toread, and foreign players such as Columbia, The North Face and Jack Wolfskin continue to gain market share in China over recent years.

Exhibit 8: Market share of selected outdoor brands in China, 2010-2013 (%)

2010 2011 2012 2013

Toread 0.5 0.9 1.3 2.1

Columbia 0.5 0.8 1.0 1.2

0.5 0.6 0.9 1.1

0.2 0.3 0.6 0.8

Source: Euromonitor International

* “Sportswear in China.” 28 May 2014. Euromonitor International.

12 Competitive landscape

13 Competitive landscape Domestic brands

 Domestic brands continue to dominate the mass market, especially in lower-tier cities and the rural market. Generally they have more extensive footprint than their foreign counterparts.

 Exhibit 9 and 10 show the top 10 domestic apparel enterprises by sales revenue and profits, respectively in 2013. Most enterprises in the list are from Jiangsu, Shandong and Shanghai.

Exhibit 9: Top 10 domestic apparel enterprises by Exhibit 10: Top 10 domestic apparel enterprises by sales revenue, 2013 profits, 2013

Youngor Group Co., Ltd. Bosideng Co., Ltd 雅戈爾集團股份有限公司 Hongdou Group Co., Ltd. 波司登股份有限公司 Heilan Group Ningbo (Zhejiang) 紅豆集團有限公司 Suzhou (Jiangsu) 海瀾集團有限公司 Wuxi (Jiangsu) Wuxi (Jiangsu) Heilan Group Youngor Group Co., Ltd. Shandong Ruyi Science & 海瀾集團有限公司 ShanShan Enterprise 雅戈爾集團股份有限公司 Wuxi (Jiangsu) 杉杉投資控股有限公司 Ningbo (Zhejiang) Technology Group 山東如意科技集團有限公司 Shanghai Jining (Shandong) China Ballon Apparel Group Bosideng Co., Ltd. Shandong Ruyi Science & 波司登股份有限公司 巴龍集團有限公司 Hongdou Group Co., Ltd. Technology Group 紅豆集團有限公司 Suzhou (Jiangsu) Qingdao (Shandong) 山東如意科技集團有限公司 Wuxi (Jiangsu) Jining (Shandong) Shandong Sinoer Group Peacebird Group Co., Ltd. 太平鳥集團有限公司 Qingdao Jifa Group Co., Ltd. Dongdu Textile Group 青島即發集團 新郎希努爾集團股份有限公司 江蘇東渡紡織集團有限公司 Ningbo (Zhejiang) Qingdao (Shandong) Weifang (Shandong) (Jiangsu) Shandong Sinoer Group Semir Group Co., Ltd. Co., Ltd. China Ballon Apparel Group 浙江森馬集團有限公司 Luthai Textile Co., Ltd. 新郎希努爾集團股份有限公司 巴龍集團有限公司 Shanghai 魯泰紡織股份有限公司 Weifang (Shandong) Qingdao (Shandong) Shandong

Source: China National Garment Association (CNGA), compiled by Fung Business Intelligence Centre 14 Competitive landscape Domestic brands

Exhibit 11: Most Valuable Apparel Brands in China, 2014  Exhibit 11 shows China’s most valuable

Rank apparel brands in the Hurun Top 200 Rank in Brand value % of market Major product in Brand Headquarter 2014 (billion yuan) value catogory Most Valuable Chinese Brands 2014 (Top 2013 200s) list. The number of apparel brands Wuxi among the Top 200s decreased from 13 1 9 Heilan 7.8 19% Menswear (Jiangsu) in 2013 to 10 in 2014, suggesting the Xiamen 1 25% Sportswear 2 Anta 6.4 (Fujian) general slowing of the apparel market. Casual wear/ 4 Semir 22% Shanghai 3 4.8 Children wear  Heilan has replaced Anta to top the list of the most valuable Chinese apparel 2 Metersbonwe 2.3 23% Casual wear Shanghai 4 brand. Its brand value amounted to 7.8 5 12 Linin 1.7 30% Sportswear Beijing billion yuan in 2014.

Suzhou 3 20% Down wear 6 Bosideng 1.6 (Jiangsu)  Most of the brands in the list were

Wenzhou specialised in menswear, sportswear, 6 Aokang 1.4 24% Leather shoes 7 (Zhejiang) casual wear, with two specialised in home textile. 10 Fuanna 1.4 30% Home textile Shenzhen 7 Wuxi 6 1.4 20% Menswear  Apparel companies in Shanghai and 7 Joeone (Jiangsu) Jiangsu are very strong in branding; 6 out 7 11 Luolai 1.4 23% Home textile Shanghai of the top 10 most valuable apparel brands are based in these two provinces. Source: Hurun Research Institute, compiled by Fung Business Intelligence Centre

15 Competitive landscape Domestic brands

 Facing the overall economic slowdown and relentless competition from overseas players, Chinese apparel retailers have expanded their product range to maintain growth. − Boisdeng, a major down apparel brand, invested 150 million yuan in a Shenzhen-based women’s wear brand Buou Buou in July 2013, on track for its diversification beyond down apparel*. − Semir, which sells youth clothing under the Semir brand and children’s clothing under the Balabala brand acquired 71% of Ningbo Zhongzhe Group, a local men’s wear company, in June 2013**, aiming to develop an up-scale and multi- brand menswear business*. − Anta, a leading sportswear brand, created its first range of outdoor products for the summer season in 2013*.

 Increasing numbers of retailers have invested heavily in marketing and promotions to boost their image. − In April 2013, Metersbonwe, a domestic casual wear brand, partnered with Hong Kong-based streetwear fashion brand Subcrew to promote its MJeans collection. − Anta has extended its partnership with Chinese Olympic Committee until the end of 2016*, expanding its sponsorships to weight-lifting, wrestling and judo teams***.

 Some retailers have sought to attract more customers by introducing foreign fashion brands. − In August 2013, Semir forged a deal with an Italian apparel company Minconf SPA under which Semir has become the exclusive distributor of two Italian premium children’s wear brands Minibanda and Sarabanda in China. The debut store of Sarabanda was set up in Shanghai in September 2013*. − Semir also formed a joint venture with South Korean women’s wear company Sisun International in September 2013, aiming to open 500 stores of Michaa, a high-end women’s wear brand under Sisun International, in China over the next five years****.

* “Top 100 Chinese brands Report.” 2014. Millwardbrown. ** “Chinese billionaire Qiu Guanghe's retailer Semir to buy menswear brand.” 18 May, 2013. Forbes. http://www.forbes.com/sites/russellflannery/2013/06/18/chinese-billionaire-qiu-guanghes-retailer-semir-to-buy-menswear-brand-stock-resumes-trade-today/ *** Anta expands its sponsorship to more national sport teams” http://industry.ijjnews.com/system/2014/09/12/010781210.shtml *** “Fast Fade: Once-Hot Retailers Are Some Of The Biggest Losers On This Year's Forbes China Rich List." 15 October, 2013. Forbes. http://www.forbes.com/sites/russellflannery/2013/10/15/fast-fade-once-hot-retailers-are-some-of-the-biggest-losers-on-this-years-forbes-china-rich-list/ 16 Competitive landscape Foreign brands

 As Chinese consumers increasingly demand for stylish and quality products, foreign players, particularly fast fashion retailers, are expected to see strong growth in China. Indeed, they have increased their investment in China over recent years.

 In terms of store numbers, China is now the most important international market for many major fast fashion brands. It is the largest international market for ZARA and Uniqlo, and the largest international market in Asia for H&M and C&A. Exhibit 12 shows the store count of the four major fast fashion brands in China during from 2010 to 2013.

Exhibit 12: Store count of fast fashion brands in China, 2010-2013

0 50 100 150 200 250 300

Uniqlo 257 2010 ZARA 2011 137 2012 H&M 2013 176

C&A 55

Source: CNCIC, Linkshop; compiled by Fung Business Intelligence Centre

17 Distribution channels

18 Distribution channels Department stores and specialty stores are the main channels for apparel distribution

 Department stores and specialty stores remained the main channels for apparel distribution in 2013, accounting for 36.3% and 29.7% of market share, respectively.

 Other emerging new retail formats such as discount stores, outlets, and multi-brand stores are gaining increasing attention over recent years. Online retailing channel is also growing very fast.

Exhibit 13: Market share of apparel by retail format, 2013

Retail format Shares Department stores 36.3% Apparel specialist retailers 29.7% Grocery retailers 5.6% Leisure and personal goods specialist retailers 12.0% Non-store retailing 11.0% Other non-grocery retailers 5.4%

Source: Euromonitor International

19 Distribution channels Department store is the main channel for mid-to high-end apparel distribution; but it is facing increasing pressure from other retail formats

 Department store is still the main channel for mid- to high-end apparel; around 50% of the total revenue of department stores come from apparel sales. However, recently, some department stores have restructured their merchandise mix to include more entertainment elements and reduce their dependency on apparel sales.

− Oriental Department Store, a domestic department store in Fuzhou, has started to restructure its merchandize mix since 2013. It has significantly reduced the floor areas for apparel tenants and increased the floor space for catering and children education services*.

− Wanda Department Store has also announced plans to reduce the number of apparel products and increase the proportion of home décor products to enrich its product mix**.

− West Lake Intime City, a shopping mall under Intime Retail Group, was revamped and re-opened in November 2014. The number of apparel brands have been reduced by one-third. 40% of the retail space are given to catering services***.

* "Department stores in Fuzhou increased space for food services." 7 March, 2014. FZNEWS. http://news.fznews.com.cn/fzjj/2014-3-7/201437BviGvkANss2228.shtml **"Wanda to decrease the dependence on apparel sales." 15 August, 2014. Winshang. http://sh.winshang.com/news-276034.html *** "West Lake Intime City re-opens, catering services is the focus." 3 November, 2014. Linkshop. http://www.linkshop.com.cn/web/archives/2014/308473.shtml

20 Distribution channels Specialty store is increasingly preferred by brand owners

 According to Euromonitor, growth in store number of apparel specialties has been impressive, at almost 12% yoy in 2013, with the number of outlets of apparel specialist specialties reaching 584,800 in 2013*.

 Specialty stores are increasingly preferred by apparel brand owners. When operating specialty stores, brand owners can have more control over price, promotion activities and store design and layout, and thus can better deliver their brand message to customers and provide a unique shopping experience for them. Specialty store operators are usually more profitable than concessionaires in department stores as they do not need to pay the high commissions.

 A majority of apparel brand owners and manufactures in China adopt a combination of both self-operated stores and franchised stores. Very often, they manage the stores in key cities or strategic or profitable locations directly while leaving other locations to franchisees as distributors.

− Direct-operated stores are more efficient when compared with franchise stores. Normally, the average sales per store of direct-operated stores is higher than that of franchise stores. Direct- operated stores are also better managed than franchise stores in terms of visual merchandizing, image control, and price control.

− In general, the more high-end the brands are, the more likely the brand owners will directly control the stores. However, it is relatively more costly to run direct-operated stores because of the higher capital expenditure (CAPEX) and higher rental costs in key cities.

* “Apparel and Footwear Specialist Retailers in China”, March 2014. Euromonitor International.

21 Distribution channels Hypermarkets and supermarkets target the lower- to middle-mass

 Hypermarkets and supermarkets are popular retailing channels for lower-priced apparel; many of which are with poor brand recognition or unbranded. Unit price is generally lower than that in department stores.

 Over recent years, some hypermarket retailers have introduced their private clothing brands targeting the mass market

− Auchan, a hypermarket chain from French, introduced low-priced private women’s wear brands Grey, Monochrome, Pretty and Blue Jeans in selected stores in China in 2014*.

− Wal-Mart, a hypermarket chain from the U.S., has also introduced private denim brand Simply Basic in selected stores in China, targeting the mass market*.

*“Supermarket chains introduce low-priced private clothing brands.” 20 February, 2014. http://big5.southcn.com/gate/big5/lady.southcn.com/6/2014-02/20/content_92997396.htm

22 Distribution channels Online retailing is the fastest growing retail channel in China for apparel

 Online retailing is the fastest Exhibit 14: Online apparel sales, 2010 – 2014 (estimates) growing retail channel for apparel in China. It is observed that many 7000 120.0% consumers are shifting their 100.8% 615.3 6000 apparel spending offline to online. 100.0% − According to China e-Business Research Centre, the total online 5000 apparel transaction value in China 434.9 80.0% 61.9% grew sharply by 42.6% yoy to 4000 reach 434.9 billion yuan in 2013. 305.0 60.0%

3000 49.9% 42.6%  “Showrooming” is becoming a 203.5 41.8% 40.0% popular phenomenon. Physical 2000 stores in shopping malls and 125.7 20.0% department stores have now 1000 more or less become the “fitting rooms” for consumers to try on 0 0.0% 2010 2011 2012 2013 2014e products before they purchase online. Online apparel sales (billion yuan) Growth (% yoy)

Source: China e-Business Research Center, compiled by Fung Business Intelligence Centre

23 Distribution channels B2C segment becomes increasingly important in apparel online retailing

 The B2C segment is becoming a more and more important segment for China’s online apparel retailing. According to EnfoDesk, the online transaction value of the B2C segment in China reached 91.6 billion yuan in 3Q14, up 54.2% yoy.

Exhibit 15: Market share of B2C apparel market, 3Q14  With a market share of 73.4%, Tmall remains an absolute market leader in

the market B2C segment for apparel Amazon China, Others, 12.4% retailing. JD.com and VIP.com come in 0.9% second and third, with 5.5% and 5.0% Vancl, 1.3% market share, respectively. Dangdang, 1.5% VIP.com, 5.0%

JD.com, 5.5%

Tmall, 73.4%

Source: China e-Business Research Center, compiled by Fung Business Intelligence Centre

24 Distribution channels Apparel is the most popular sub-category purchased online; female online shoppers purchase apparel more frequently than male shoppers

 According to iResearch, “clothing, shoes, hats, bags and suitcases, outdoor products” were the most popular categories purchased online in 2013, respectively taking up 41.3% and 28.0% of shares among the top 10 favorite commodities purchased by shoppers online. Female online shoppers also bought apparel more frequently than male shoppers.

Exhibit 16: Top 10 commodities favoured by Chinese Exhibit 17: Top 10 commodities favoured by Chinese male female online shoppers in 2013 online shoppers in 2013

Clothing, shoes, hats, bags and suitcases, Clothing, shoes, hats, bags and suitcases, 41.3% 28.0% outdoor products outdoor products

Prepayment of telephone bill 15.4% Prepayment of telephone bill 19.9%

Cosmetics and personal care products 9.4% Household items 8.1%

Household items 7.8% Lottery 5.7%

Maternal and baby products 4.9% Maternal and baby products 5.3%

Fresh food, fruits and other food 4.4% IT products 4.8%

Books, audio and video products 4.1% Books, audio and video products 4.8%

Home appliances 1.8% Telecommunication products 3.7%

Game cards and props 1.4% Fresh food, fruits and other food 3.1%

Virtual currency such as Q-coin 1.4% Virtual currency such as Q-coin 2.8%

-10% 0% 10% 20% 30% 40% 50% 60% -10% 0% 10% 20% 30% 40% 50% 60%

Share % Source: iResearch Inc. Share %

25 Distribution channels Online players are enhancing competitiveness with upgraded services

 Excess inventory remains a concern for many online retailers. Some online apparel players have set up new websites to offer deep discounts to clear their obsolete inventories. − Dangdang and JD.com launched Weipinhui (尾品匯) and Shantuan (閃團) respectively in May 2014 to sell apparel products at clearance prices.

 Some apparel retailers have launched online pre-order services for better inventory management. − Anta rolled out an online pre-order service in 2014, allowing customers to order products in advance on its online store. − In 2014, Septwolves also launched an online pre-order service for its tailor-made clothing products.

 In addition to setting up new website to clear surplus inventories, some online retailers have also developed their own apparel brands to enhance competitiveness. − Yihaodian rolled out its own apparel products under the Bestluck brand on its online platform in May 2013.

 Given the increasing popularity of online shopping, many foreign apparel retailers have set up online stores on third-party e-commerce platforms such as Tmall.

Exhibit 18: Selected foreign apparel retailers that have opened their online stores on Tmall in 2014 Apparel brands Tmall store Date Boss Orange by Hugo Boss http://hugoboss.tmall.com/ November, 2014 Zara http://zara.tmall.com/ October, 2014 Topshop http://topshop.tmall.com/ September, 2014 Burberry http://burberry.tmall.com/ April, 2014 Source: Internet resources, compiled by Fung Business Intelligence Centre

26 Key highlights

27 Multi-label stores (also known as “concept stores”) increasingly in focus

 Multi-label stores (also known as “concept stores”) which stock lesser-known designer brands have been growing in prevalence in China. These stores, emphasising on unique and contemporary fashions and bringing together talented designers locally and internationally, have responded to the needs of increasingly sophisticated Chinese customers, particular in key cities, who are moving from big names to brands with personal style and individuality.

28 Multi-label stores (also known as “concept stores”) increasingly in focus (Cont’d)

 Exhibit 19 below lists some examples of multi-label stores in China.

Exhibit 19: Selected examples of multi-label stores

Product offerings

Multi-label store Women’s Men’s Children’s Footwear Accessor Store location clothing clothing clothing ies

Beijing Triple-Major Shanghai http://www.triple-major.com/ Chengdu

Xinlelu Shanghai http://www.xinlelu.com/

The Villa Shanghai Shanghai http://www.shopthevilla.com/asia/main/index.php

Alter Shanghai http://www.alterstyle.com/

Source: Internet resources, compiled by Fung Business Intelligence Centre 29 Fast fashion brands remain strong

 Fast fashion brands have sustained high growth momentum in China over recent years.  To meet the strong demand of Chinese customers and capture a larger market share, many fast fashion players have continued to ramp up their presence in China.

Current: 450 stores in China Current: > 40 stores in China Planning: over 500 stores in Planning: 150 stores by 2015 China by January 2015

Planning: add 200 new stores in Planning: over 100 stores in smaller Chinese cities in the fiscal China over the coming decade year of 2014

 Apart from expansion, some fast fashion retailers have pursued multi-brand strategy and launched new brands to capture larger market share

− Fast Retailing, Japan’s leading fast fashion group which holds Uniqlo, made debut of two more fast fashion brands GU and PLST in Shanghai in September and October 2013. − Mango, a Spanish fast fashion brand, introduced a plus-size line Violeta on its China’s official website in January 2014.

30 Luxury apparel brands see flagging demand; affordable luxury apparel on the rise

 The growth of China’s luxury sales has started to slow since 4Q11. Bain & Company expects luxury consumption in China to reach 15 billion euros, or 117.8 billion yuan in 2014, down 2% yoy*, the first decline over a decade of growth in luxury sales. Luxury apparel also saw significant drop in sales.

 That said, driven by a number of positive factors such as strong economic underpinnings, household disposable income and a fast growing affluent middle class, China remains to be one of the most important markets for global luxury retailers. Exhibit 20 on the next slide highlights some common strategies pursued by global luxury players.

 Given the tighter anti-extravagance measures, Chinese consumers are now more prudent when spending on premium luxury apparel. The skyrocketing prices of some premium luxury brands have prompted consumers to turn to alternative affordable luxury apparel and designer clothes at relatively cheaper prices.

* “Worldwide Luxury Market Monitor.” Oct 2014. Bain & Company. P29.

31 Luxury apparel brands see flagging demand; affordable luxury apparel on the rise (Cont’d)

Exhibit 20: Common strategies adopted by selected global luxury apparel players

Strategies pursued in China Luxury brand Announced date Strategies in China

• Launched its flagship store on Tmall, China’s largest online shopping platform, in April 2014. This is the Burberry April 2014 first time that an international luxury brand entered the Tapping the online retail market third-party online shopping platform in China

Calvin Klein August 2014 • Opened its online store on Tmall in September 2014

• Bought back a 40% stake in its Chinese mainland Taking back China franchises Hugo Boss July 2014 and Macau joint venture from franchise partner Rainbow Group

July 2014 •Opened its largest Asian store in Beijing Ramping up presence in China Max Mara •Announced plans to open 25 to 35 new stores in August 2014 China every year

Source: Internet resources, compiled by Fung Business Intelligence Centre

32 Apparel retailers step up efforts to explore O2O initiatives

 An increasing number of apparel retailers are making more efforts to explore “O2O”, or “online and offline integration”, to reach more customers. − In Metersbonwe, a unique QR code is printed on the product tag of each of the products available at its stores; customers can use their mobile devices to scan the QR code and they will be directed to the product page on Banggo.com, Metersbonwe’s online store. They will receive the product information and can shop online via their mobile devices. − Zara set up an online store, www.zara.cn, in China in September 2013. The company encourages consumers to collect online purchases from their physical outlets; it also hopes to boost store visits*.

 Metersbonwe, Uniqlo and Zara are some prominent apparel retailers that have implemented O2O initiatives in various aspects.

Exhibit 21: O2O initiatives adopted by selected apparel retailers, as of September 2014 Specialty Online/mobile initiatives In-store initiatives Online and offline integration stores Online Third party Mobile Social Social website platforms portal media : media: Sina WeChat Weibo √ √ √ √ √ • Free WiFi • Integrate online and offline membership • Touch-screen device in some store branches • Same products and same price for online and offline channels • Display QR codes on tags, directing to Banggo.com • Support mobile payment √ √ √ √ √ •Display QR codes in-store, which has to be scanned • Integrate online and offline membership by Uniqlo’s mobile app • Same products and same price for online and offline channels • Support mobile payment √ √ √ √ √ • Display QR codes on tags • Integrate online and offline membership • Same products and same price for online and offline channels • Order online, collect in offline stores • Goods purchased online can be returned to stores or by post

Source: Internet sources; compiled by Fung Business Intelligence Centre

*”Apparel and Footwear Specialist Retailers in China.” March 2014. Euromonitor International. 33 3D virtual dressing rooms gain in popularity

 To optimise consumer shopping experience, some apparel brands have rolled out 3D virtual dressing rooms in-store, a fitting technology which allows shoppers to see how they look in selected fashion and accessories without physically trying them on.

− Lilanz, a domestic men’s wear retailer, launched a 3D virtual dressing room at its Yiwu outlet in March 2014. − Kaiser, a domestic high-end apparel retailer, also rolled out a 3D virtual dressing room at its first O2O experience store in Guangzhou in April 2014.

 Some shopping malls, department stores and online retailers have also launched 3D virtual fitting technology.

− Teemall, a domestic shopping mall in Guangzhou, introduced a 3D virtual dressing room in August 2014. It is the first shopping mall in Guangzhou to launch 3D virtual fitting technology. − Xinghua Department Store, a domestic department store in Foshan, also launched a 3D virtual dressing room in August 2014. − JD.com, a leading B2C online retailer in China, added a 3D virtual fitting function on its iPad app in January 2014. − Rainbow Department Store, a leading department store chain in China, also announced its plans to launch a 3D virtual dressing room in November 2014.

34 Department store operators develop their own private apparel labels or proprietary brands

 Introducing private labels or proprietary brands is a good way for retailers to strengthen core competence. Private labels and proprietary brands may also lift profit margin and garner consumer loyalty. Exhibit 22 shows some of the private brands launched by selected department stores.

Exhibit 22: Private labels of selected department stores Department store Private label Product category Intime Department Store Just Intime Women’s apparel Ito Yokado Department Store pbi Apparel Wangfujing Department Store FIRST WERT Men’s apparel Golden Eagle Department Store Aquila D'oro Men’s apparel IVREA Men’s apparel LISALEN Women’s apparel Antonghui Kids’ apparel

Source: Internet resources, compiled by Fung Business Intelligence Centre

35 Overseas apparel brands explore new ways to tap the China market

Eyeing the huge potential of the China market, overseas apparel brands are selling to Chinese consumer via various ways:

 Some foreign apparel brands or retailers choose to enter the China market via online platforms without setting up physical stores. − U.K.’s fast fashion brand Topshop entered China in September 2014 through setting up online stores respectively on Chinese online retail platforms Shangpin.com and Tmall.

− Another U.K.’s high street brand Miss Selfridge also made its debut in China in September 2014 through opening an online store on Shangpin.com.

 Some apparel brands also sell to Chinese consumers by opening stores on “Haitao” platforms - B2C platforms which sell imported products to Chinese consumers. Over recent years, the Chinese government has launched several regulations to promote cross-border e-commerce business. One such initiative is the establishment of pilot zones to facilitate cross-border e-commerce businesses*. Brands that are sold on “Haitao” platforms and are imported through these pilot zones can enjoy lower import duties at rates applicable to personal items, which are usually lower than the tax rates for general trade. − e.g. Juicy Couture and Sugarman have set up online stores on tmall.hk, a global B2C marketplace under Alibaba; all imported products are processed via pilot zones.

 Some overseas apparel e-commerce players partner with local third-party online payment providers, to allow Chinese customers to settle payment in yuan when they shop on U.S. websites. − Borderfree, a leading cross-border ecommerce services provider based in New York, entered into a partnership with Alipay, China’s leading e-payment service provider, bringing the latter’s ePass payment system to apparel brands such as Ann Taylor and Aéropostale.

*In December 2012, the government has established pilot zones in Shanghai, Chongqing, Hangzhou, Ningbo and Zhengzhou. Guangzhou and Shenzhen Qianhai aslo joined the pilot program in September 2014. 36 Snapshots of sub-sector performance

37 Background

 The China National Commercial Information Centre (CNCIC) conducts monthly survey to around 200 major department stores* in China to study the performance of different cosmetics sub-sectors.

 In this newsletter, performance of the following product sectors is examined:

* It is noteworthy that the CNCIC data only covers sales in major department stores. The actual overall market share of apparel brands may deviate from the CNCIC data. 38 Ladies’ wear

Exhibit 23: Ladies’ wear - Brand share of the top 10 players, 2013

Brand Market share (%)

Vero Moda 3.82

Only 3.78

Girdear 2.37

Ochirly 1.66

Jiuzi 1.61

Marisfrolg 1.52

Elegant Prosper (EP) 1.51

La Chapelle 1.46

E-land 1.36

Amass 1.34

Others 79.57

Source: CNCIC

39 Menswear

Exhibit 24: Men’s suit - Exhibit 25: Men’s shirt - Brand share of the top 10 Brand share of the top 10 players, 2013 players, 2013

Brand Market share (%) Brand Market share (%)

Youngor 6.67 Youngor 6.94

Shanshan 2.63 Rouse 2.92

Goldlion 2.59 Goldlion 2.86

Romon 2.07 Pierre Cardin 2.59

Vicutu 2.04 Myconch 2.43

Joeone 1.99 Hengyuanxiang 1.89

Pierre Cardin 1.95 Kaikai 1.79

Baoxiniao 1.76 Shanshan 1.55

Satchi 1.72 Romon 1.54

Selon 1.21 Hongdou 1.45

Others 75.37 Others 74.04

Source: CNCIC

40 Children’s wear

Exhibit 26: Children’s wear - Brand share of the top 10 players, 2013

Brand Market share (%)

Balabala 4.81

Adidas 4.10

Nike 3.84

Annil 3.66

Les Enphants 2.80

Souhait 2.30

Paw in Paw 1.97

Eland 1.75

Snoopy 1.69

Goodbaby 1.68

Others 71.40

Source: CNCIC

41 Sportswear

Exhibit 27: Sportswear - Brand share of the top 10 players, 2013

Brand Market share (%)

Nike 13.23

Adidas 12.69

Li Ning 5.51

Nike360 3.88

Anta 3.42

Kappa 3.38

Converse 3.27

Jordon 2.96

361 Degree 2.63

Toread 2.34

Others 46.69

Source: CNCIC

42 Ladies’ underwear

Exhibit 28: Ladies’ underwear - Brand share of the top 10 players, 2013

Brand Market share (%)

Maniform 7.31 Aimer 7.31 Embryform 6.91 Triumph 6.04 Ordifen 4.44 Gujin 4.28 Wacoal 3.88 Sunflora 3.32 Fandecie 2.79 Imis 2.52 Others 51.20

Source: CNCIC

43 For more information

Fung Business Intelligence Centre Asia Retail and Distribution 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong

Tel: 2300 2470 Fax: 2635 1598 Email: [email protected] http://www.funggroup.com/

© Copyright 2014 Fung Business Intelligence Centre. All rights reserved. Though Fung Business Intelligence Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Fung Business Intelligence Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document.

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